Amended Accountancy Law: Will the watchdog bark, finally?

Are auditors watchdogs or bloodhounds? Institute of Chartered Accountants of India’s (ICAI) former president Nihar Jambusaria preferred the first description to defend his theory that auditors should not be unfairly blamed for the ever-growing accounting mess in many companies. The jury is still out on this.

Debates with such canine analogies, however, are not on the immediate agenda of India’s auditors at this point. For, most of them feel the government is out to make them toothless anyway. And the tool with which the teeth are being extracted is the Chartered Accountants, Cost and Works Accountants and Company Secretaries (Amendment) Act, 2021 that was passed by the Parliament last week. The main grouse of the ICAI is that the Act has effectively reduced its status to an examination board and has diluted its role in disciplinary proceedings by stripping the president of the executive role.

But the writing on the wall was clear for a long time after the prime minister expressed serious concern over the efficacy of the ICAI’s disciplinary mechanism. Speaking on the foundation day of the institute in 2017, he had said that the ICAI had only prosecuted 25 errant auditors in the last 11 years, and as many as 1,400 cases were pending. The government had immediately constituted a high level committee in the same year to look into the working of the institutes. The recommendations of the committee have laid the foundation of the Act. In fact, it came as a surprise to many that the Act took so long to be born after the PM’s reprimand.

That an overhaul of the country’s accounting regulatory mechanism was necessary is evident also from the recent recommendation by the Central Vigilance Commission for a special audit into the accounts of the ICAI by the Comptroller and Auditor General. This followed complaint of serious financial irregularities during the tenures of two former presidents. CVC asked for greater disclosures and transparency in the functioning of the institute and advised it to put out important policy decisions in the public domain.

The fact also is that the self-regulatory structure of the accounting profession is past its expiry date. In the past, the committee of experts on regulation of audit firms appointed by the government observed that when professional bodies self-regulate their professions, conflict of interest can arise. Many developed economies have also acknowledged the shortcomings of the self-regulatory structure and switched over to independent oversight bodies. In India, however, it didn’t make much headway due to persistent objections of the ICAI till the government set up the National Financial Reporting Authority (NFRA) in 2018.

In that sense, most of the provisions of the new Act are well-directed, as the institute has indeed failed to move with the changing times. One can’t but agree with the observations made by R Naranaswamy, retired professor of finance and accounting at IIM Bangalore. Writing in Business Line, he said “the ICAI was set up in 1949 largely as the Indian version of the UK institute. Its evolution since then has mirrored the rise of the licence raj that was characterised by uncompetitive capital, product and labour markets, worthless form-filling and box-ticking…”

What the Act says is well known by now. But where the government may have erred is in not considering a valid recommendation of the Standing Committee on Finance to set up multiple bodies (Indian Institutes of Accounting) on the lines of the Indian Institutes of Technology and the Indian Institutes of Management for imparting education and licensing. This was a golden opportunity to push the reform to promote transparency in the working of audit firms.

The qualification and licensing of accountants in advanced countries like the US, UK, and Canada is done by multiple bodies, unlike in India, where one institute (ICAI) has statutory monopoly over the whole profession. The standing committee, led by Jayant Sinha, felt that such an institutional arrangement was necessary in India “to promote healthy competition, raise the standard and quality of auditing and accounting and improve the credibility of financial reporting.”

The government’s reluctance to follow this suggestion is inexplicable as it had enough facts at its disposal. For example, the representative of the ministry of corporate affairs had stated that in the US, an accountant has to go to the State Board of Accountancy. For public listed companies, there is Public Company Accounting Oversight Board, which is independent from the profession. The American Institute of Certified Public Accountants (AICPA) is a voluntary organisation but they can’t give licence to practice.  Also, there are 56 state boards for accountancy, all the members of which are appointed by the government. There would be state chartered accountant bodies, but they are not regulating themselves. To practice in the US, one doesn’t need to become a member of the AICPA; one can take a licence from the government and practice.

An independent witness submitted the following suggestions to the standing committee, most of which could have been included in the Act. The Indian Institutes of Accounting will be statutory bodies similar to IITs and IIMs and will be set up across the country. Each IIA will have a board of governors consisting of experts and government officers drawn, among others, from the ministries of finance, education and corporate affairs, and the boards will have full functional, financial and administrative autonomy for their efficient functioning.

The proposal visualises the IIAs as academic institutions that educate licensed professionals similar to All India Institute of Medical Science, National Law Schools, and so on. In contrast, the ICAI will be a professional certification agency, much the same way as it is now.

These are good suggestions and must be considered for implementation in the future. After all, while the watchdog need not become a bloodhound, it should at least bark.